Is Property Truly Affordable?

Some of the more recent reports on property as published by our incumbent major newspaper, The Straits Times, seem to imply that property prices have softened and thus has become much more affordable for the general public. In Saturday’s newspapers (December 4, 2010), an article called “Our First Home” appeared and talked about how median COVs have fallen since the August 2010 cooling measures were introduced, and also gave examples of two young couples who managed to find their dream homes. One of them purchased a 4-room flat at Bukit Panjang (Mr. Kelvin Teo and wife Alberta), while another (Mr. Ang Tiong Wei) was featured purchasing an EC at the newly launched Esparina Residences in Sengkang last month. Overall, the news article(s) tried to portray a very rosy picture of couples finally managing to clinch their very first home, while property prices have “softened” enough for most first-time buyers to readily afford a flat of their choice. But is this really the case?

Much has been talked about measures of affordability such as Price-to-income ratio (HPI), which compares median house price to annual household income. Another often used measure is the debt-servicing-ratio, referred in short-form as DSR. DSR is the proportion of income used to pay mortgages, and it is generally recognized that this should not exceed 35% for it to be comfortable for the mortgagee. In a very comprehensive article (published in TODAY November 12, 2010) written by our Minister for National Development Mr. Mah Bow Tan on housing affordability, it was mentioned that HPI for young couples was around 4.5 for resale flats. But in the example quoted in Saturday’s news, the couple was granted a $50,000 HDB grant on a 20-year old flat in Bukit Panjang (not the most accessible of places in Singapore), and their household income was less than $3,500 a month. A simple back of the envelope computation will show that if the grant was NOT given, the HPI would have been close to 9x or 10x. There may be other similar cases floating around Singapore which have not been highlighted by the mainstream media, but which will become easy fodder for the opposition parties or alternative independent news websites and blogs. The point here is that HPI is still significantly high in Singapore for most young couples who had just started working and do not have high incomes and large savings. Even though a few luckier couples managed to find their “dream” home, they may still be over-leveraged from the point of view of HPI. Now let’s take a look at the DSR in the next section.

The international benchmark for DSR is around 30-35%, and the same Mah Bow Tan article mentions that the DSR for new HDB flats in non-mature (i.e. remote) estates averaged 23% based on a 30-year loan. Accordingly, of course, the article then categorically states that these flats are affordable, even though the ratio comes close to 29% for premium projects such as Punggol Waterway Terraces. I think we have to keep things in perspective, though. What the articles have been talking about here are 30-year loans, which basically span close to half a person’s natural lifetime! I shudder to think of what our society is becoming when taking 30 or even 35-year loans is becoming the norm rather than the exception, as the articles talking about DSR use this tenure as a benchmark. One cannot assume that he is able to “flip” the property at a higher price within 5 to 10 years, as the market, being unpredictable, may frustrate such attempts and you may have to go on servicing your debt into your twilight years. Also imagine a case where the loan tenure was shortened to 20 or 25 years instead of the current default 30 years, I think the DSR would probably soar above 35% for many cases; and many would end up being forced to dip into their cash savings instead of just using their CPF OA to fund their over-priced houses. Not to mention that a lot can happen in a span of 30 years, such as job cuts, pay cuts and retrenchments, which may greatly affect one’s ability to service the mortgage loan. Therefore, generally DSR is a number which can be manipulated by the media depending on the metrics used, and readers have to be careful to sift out information which may contradict conventional wisdom (such as how many people actually fully pay out 30-year loans, as the interest accumulated by then would probably amount to close to 50% of the original cost of the property!).

Anyhow, back to the case of Mr. Ang buying Esparina Residences (an executive condominium or “EC”) at Sengkang. It was reported that he felt lucky to have secured a flat and that he “only” paid $899,000 for his three-bedroom, 1,184 square foot flat. Please note that this is AFTER a $30,000 housing grant, or else the EC would have cost a whopping $929,000! A simple calculation will show that the unit costs $785 psf, which is a hefty price to pay indeed for a condo with HDB-like features and in a remote location like Sengkang. Let’s not even consider the fact that Mr. Ang and his wife CANNOT be earning more than $10,000 a month or else they would be disqualified from purchasing an EC. Let’s take the scenario where their combined household income is exactly $10,000 a month, or $120,000 per annum. This means that the HPI ratio would be about 7.7x for them, which is not exactly low either. The DSR cannot be computed unless we know more about their loan quantum and tenure, but I can bet it’s probably a 30-year loan and that it is “affordable” by conventional standards of having a <35% DSR.

The problems as highlighted above are due to the pervasively low interest rate environment we find ourselves in. Note that for resale flats and EC, it is clearly stated on HDB’s website that one needs to take a bank loan to finance the purchase, and that purchasers are not entitled to obtain a HDB concessionary loan (at a constant 2.6% per annum). Of course, most readers should be aware that bank loans are being offered at phenomenally low rates now of about 1% to 1.5% for a lock-in period of 2 to 3 years, which makes the one taking a HDB concessionary loan look like an idiot (incidentally, I am one of those “idiots”). However, one should also note that interest rates for the last 18 months have been artificially low, and that the long-term average interest rates for mortgage loans should hover around 3% to 4% for bank loans (i.e. higher than HDB’s concessionary loans, which is why it was termed “concessionary” in the first place). So the couples featured in these articles are literally staring at a “time bomb”, as they are fully exposed to interest rate increases in the near future after their lock-in period for their super low-rate bank loans expire. This could literally mean a mortgage installment which is either double or triple that of their current amount, as rates may rebound from a low 1% to 1.5% to as high as 3% to 3.5% which is the long-term average. Even re-financing may not help as all banks would have raised the rates for their new bank loans in tandem with the global economic recovery some time in 2013 or 2014. Therefore, I assert that the low interest rate environment is exacerbating the illusion of affordability by granting couples with cheap current loans which may turn out to be very expensive mistakes in the future.

So with the above evidence being presented, ask yourself this – is property really affordable in Singapore?